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FARNBOROUGH, ENGLAND – JULY 18: The Boeing logo is seen on the side of a Boeing 737 MAX during the … [+] Farnborough International Airshow.(Photo by John Keeble/Getty Images)
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For the last several months, Boeing has been conducting a review of potential divestitures to reduce its enormous net debt load of $45 Billion. The debt was accumulated over the past six years by the production halt of the 737MAX due to two fatal crashes in 2018 and 2019, followed by the pandemic in 2020 and continued quality issues which have caused regulators to limit production of the aircraft.
The guiding principle for the portfolio evaluation is, rightly, “return to the core”, that is, monetizing assets that are not directly supportive of the development of a new, large commercial transport aircraft – which is critical to the company’s long term survival. In many ways, the natural outcome of such a portfolio pruning exercise will be to return Boeing to what it was before its merger with McDonnell Douglas in 1997.
That merger combined the then number one commercial aircraft manufacturer (Boeing) with the number three (Douglas Aircraft). At the time Airbus was still building its position globally and was in the number two position. The merger also significantly bolstered the defense business in the portfolio and catapulted Boeing to the status of a “national champion.” Although Boeing paid $13.5 Billion for McDonnell Douglas, the union functioned largely as a merger, combining product lines and senior management.
In the intervening years Boeing embarked on a buying spree of aerospace businesses focusing on supportive services and aftermarket. The goal of these acquisitions was to diversify, but also to access the better margins in aftermarket parts and systems.
FARNBOROUGH, ENGLAND – JULY 18: General Electric GE9X engine on a Boeing 777X during the Farnborough … [+] International Airshow 2022. (Photo by John Keeble/Getty Images)
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It is an oddity that aerospace component manufacturers usually have better profit margins than the overall OEM who is designing and producing the airplane. This is because structural components have less of an aftermarket “tail” than systems that undergo wear and tear (brakes, landing gear, engine turbine parts), or that are tethered to software and electronic upgrades.
At the time, Boeing was making good money producing the best selling 737 series of narrow body commercial aircraft – the workhorse of the hub and spoke system of the airlines – and successfully introduced the 787 in the early 2000’s, which after initial teething problems, was a best seller as well for the international market.
Using these proceeds, Boeing made twenty seven acquisitions of related companies up to the tragic crashes of the MAX. This represented outlays of approximately $15 Billion in then year dollars.
And in July of 2017 Boeing announced the creation of Boeing Global Services which aggregated many of these disparate businesses under an umbrella meant to develop a “third leg of the stool” with Commercial Aircraft and Defense. The aspirations to grow this entity to $50 Billion of revenue were dashed by the upheavals of the MAX and the pandemic. As a result, the aggregate unit hovered in the $18 Billion revenue range.
EFB Electronic-Flight-Bag screen showing an approach plate and airport map next to the nose-wheel … [+] steering controller handle in the cockpit of a Boeing 787 (Photo by: Aviation-images.com/Universal Images Group via Getty Images)
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Now, the largest assets in this unit are being eyed for divestiture, as they were, almost by definition “non-core”. Chief among these will be Jeppesen which provides navigational and flight planning support to aircrews. Jeppesen was acquired in 2000 for $1.5 Billion. Since its purchase, its revenues have grown fourfold and it boasts operating margins greater than 25%. Furthermore, it is a digital/software based business which can command higher acquisition multiples. Proceeds from its sale could well exceed $7 Billion according to analysts at Jeffries.
Similar to Jeppesen is Foreflight, which is an “electronic flight bag”, that supports pilots with flight planning and in-flight navigation. Acquired in early 2019, it could conceivably fetch $ 1 Billion today.
Two other companies, Aviall and KLX, were acquired in 2006 and 2018 respectively. Aviall, a clearinghouse for aerospace parts, was purchased for $1.7 Billion. KLX, a distributor of aerospace fasteners and hardware, was acquired for $4.25 Billion. Aviall was renamed Boeing Distribution Incorporated in 2020 after the KLX acquisition and KLX was renamed Boeing Distribution Services, Inc. to signify the emphasis on supply chain solutions. Jeffries believes the two units could command $12 Billion in a sales process.
Boeing has many more smaller units in training and other areas that might be sold, but many would not significantly move the needle, and it is most likely that these larger units will be the immediate focus.
Many speculate that Boeing might split its defense and commercial aircraft units, somewhat similar to the move backed by activist investor Elliott Investment Management against Honeywell. Elliott has taken a $5 Billion stake and is pushing for separation of the company’s automation and aerospace units. In truth, there is very little overlap between Boeing’s Defense and Commercial units and splitting them would not be challenging.
The difficulty with such a move for Boeing, however, is that the defense unit is losing several billion dollars a year owing to overruns on fixed price development programs. At the time when Boeing was cash rich, it “bought” into these programs to supplement the legacy C-17, F-15 and F-18 McDonnell Douglas programs that were coming to the end of their procurement lives after many decades.
Although pieces of the defense unit would be attractive to other companies such as Raytheon Technologies, Lockheed Martin, Northrop Grumman, L3Harris, General Dynamics or many others, the sale of the entire unit could be challenged on anti-trust grounds, given the concentration of the US defense industry at the top of the food chain.
However, with a new administration poised to take control in a month’s time that is pro-business and potentially more lenient in anti-trust policies, that antagonistic scenario could be altered. When Boeing and McDonnell Douglas merged, Boeing was over three quarters commercial. In the long run, Boeing may be ultimately heading back to a similar profile as it positions for recovery.
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